definition of welfare

Upload: nramagopal

Post on 08-Apr-2018

220 views

Category:

Documents


0 download

TRANSCRIPT

  • 8/7/2019 Definition of Welfare

    1/26

    DEFINITIONS OF WELFARE

    (This handout is largely based on the ideas of Amartya Sen)

    UTILITARIAN OR UTILITY DEFINITION OF WELFARE

    Utilitarianism defines welfare in terms ofutility. Utility means pleasure or

    Happiness. The welfare of a person A is said to be higher than the welfare

    of a person B if the utility of A is greater than the utility of B

    Ua > Ub = Wa > Wb

    Where Ua is the utility of person A

    Ub is the utility of person B

    Wa is welfare of person A

    Wb is welfare of person B

    Bentham is considered as the founder of utilitarianism. According to

    Bentham the goal of economic policy is the greatest happiness of the

    greatest number. This means that economic policy should maximize the

    sum of the utilities of all the people in the society. Policy should maximize

    ( U1 + U2 + U3 --- + Un), where U1 --- Un are the utilities of the people

    in the society. Suppose P1 and P2 are two economic policies. The policies

    produce the following total utility:

    P1 : ( U1 + U2 + U3 --- + Un) = 1000

    P2: ( U1 + U2 + U3 --- + Un) = 2000

  • 8/7/2019 Definition of Welfare

    2/26

    P2 results in higher total utility than P1. Therefore policy P2 is preferred to

    P1.

    PROPERTIES OF UTILITARIAN DEFINITION OF WELFARE:

    Sen classifies the properties of the utility definition of welfare as follows :

    1) Cardinal utility

    2) Comparable utilities

    3) Consequentialism

    4) Neutrality

    5) Anonymity

    1) Cardinal utility: it is assumed that utility can be cardinally

    measured. That is, it is assumed that we can either measure the

    difference between utilities or the actual utility values.

    2) Comparable utilities : It is assumed that interpersonal

    comparisons of utility( can )

    can be made. This means that the utility of one person can be

    compared with the utility of another person.

    3) Consequentialism : A policy or action should be judged by its

    consequences or results. (

    ).

    ) A good policy/action is one which results in higher utility. A

    policy/action is bad if it results in lower utility. For example, an

  • 8/7/2019 Definition of Welfare

    3/26

    action which causes pollution is bad only if it results in lesser utility.

    No policy or action is good or bad by itself

    4) Neutrality : only utility information ( )

    is taken into account. That is, the welfare of a person or a social

    state is defined only with reference to the utility levels.

    5) Anonymity : The identity of individuals is not taken into

    consideration. Only the total utility level is assumed important.

    Social welfare ( ) is assumed to remain same

    if the utility values are interchanged between people, since the

    individual identity is not important. For example assume policies

    P1 and P2 have the following results for two people A and B :

    P1 : Ua = 100, Ub = 200. Ua + Ub = 100 +

    200 = 300

    P2: Ua = 200, Ub = 100. Ua + Ub = 200 +

    100 = 300

    Utility values are interchanged (

    ) but the total utility is same and therefore P1 and P2 are assumed to

    result in same welfare levels. Whether A gets more utility or B gets

    more utility is not important.

    CRITICAL EVALUATION OF UTILITY DEFINITION

  • 8/7/2019 Definition of Welfare

    4/26

    MERITS OF UTILITY DEFINITION

    The following are the merits of the utility definition of welfare:

    1) Sen says that a good definition of welfare should define welfare in

    terms of an object which is the goal or an end in itself. It should not

    be the means to some other goal (

    ).

    For most people happiness is a goal in itself. Since the utility definition

    defines welfare in terms of an object ( happiness) which is a goal in

    itself, it is a good definition of welfare.

    2) Utility definition uses more information than the preference

    definition of welfare ( the most widely accepted definition):

    a) The preference definition uses only ordinal measure i.e., only

    ranking information. Utility definition uses cardinal measure

    which provides more information than ordinal measure.

    b) The utility definition allows for interpersonal comparisons of

    utility. This information is required for evaluation of

    economic policies. Preference definition does not use this

    information.

    c) The preference definition uses only the information obtained

    from observed behaviour of a consumer. It neglects the

    mental state of a consumer which cannot be observed. (

  • 8/7/2019 Definition of Welfare

    5/26

    ). Utility definition uses the information about the mental state of

    a consumer also.

    3) Some economists say that the utility definition supports equal

    distribution of income. The marginal utility from money for a rich

    person is lower than marginal utility from money for a poor person.

    Therefore a policy which increases the income of the poor

    maximizes total utility. The redistribution of income from the rich

    to the poor also maximizes total utility.

    LIMITATIONS OF THE UTILITY DEFINITION

    1) The utility definition ignores non-utility information (

    ). Any information about a social state other than the utility levels is not

    taken into account. For example the definition ignores information

    about freedom or the literacy levels, because this is non-utility

    information. The non-utility information is often very important

    component of welfare. A society may have high total utility but very

    less freedom. It is not correct to say that the welfare is high in this

    society.

    2) Sen says that since non-utility information is ignored, the utility

    definition leads to physical condition neglect(

    ). For example, a person with high utility can be handicapped (

    ) and not able to work. But the physical handicap is ignored by utility

  • 8/7/2019 Definition of Welfare

    6/26

    definition. Due to physical condition neglect, a handicapped person

    with high utility is assumed to have higher welfare than a healthy

    person with low utility.

    3) According to Sen, the level of utility can depend on the culture of

    people. So in a culture where women are taught to accept physical

    condition neglect, their utility will be high even when they have poor

    health and less freedom than men. Therefore the utility definition

    ignores the harmful effects of cultural traditions, especially on the

    welfare of women.

    4) Since utilitarianism is concerned with total utility, the distribution

    of utility is neglected. For example consider the following policies:

    P1 : Ua + Ub = 100 + 100 = 200

    P2: Ua + Ub = 0 + 200 = 200

    Both policies are considered to result in same welfare levels although in

    P2 person A gets zero utility. The unequal distribution in P2 is ignored

    by utility definition.

    4) Since distribution is neglected, utilitarianism can be used to

    support unequal distribution of income. A policy P1 is considered

    better than P2 even if P1 makes the rich richer and the poor poorer.

    Example: A is rich person and B is poor person.

    P1 : Ua + Ub = 400 + 100 = 500

    P2 : Ua + Ub = 900 + 50 = 950

  • 8/7/2019 Definition of Welfare

    7/26

    In P2 the rich person A is made richer and poor person B is made

    poorer. But P2 is considered best policy. Therefore utilitarianism

    supports unequal income distribution.

    PREFERENCE DEFINITION OF WELFARE

    The preference definition of welfare is the most widely accepted

    definition. According to the preference definition, the preferences of

    an individual indicate her welfare. If a consumer A prefers good x to

    good y, we can say that her welfare is higher in consuming x.

    According to the preference definition:

    xPy = Wx > Wy

    yPx = Wy > Wx

    xIy = Wx = Wy

    Where xPy means x is preferred to y

    yPx means y is preferred to x

    xIy means the consumer is indifferent ( ) between

    x and y

    Wx is welfare from consuming x

    Wy is welfare from consuming y

    The preference of an individual can be indicated either by the money

    she is willing to pay for a good or by her vote in the case of elections.

    PEROPERTIES OF PREFERENCE DEFINITION

  • 8/7/2019 Definition of Welfare

    8/26

    Sen classifies the properties of the preference definition of welfare as

    follows:

    1) Ordinal utility

    2) Non-Comparable utilities

    3) Behaviourism

    4) Neutrality

    5) Anonymity

    6) Self-interest motivation.

    1) Ordinal utility: The preference definition of welfare assumes that

    utility can be measured ordinally and not cardinally. That is, it is

    assumed that we can rank welfare levels of individuals but no other

    information can be obtained. For example, we can determine that

    Wx > Wy but we cannot measure the difference between Wx and

    Wy or the actual welfare levels.

    2 ) Non-comparable utilities ( ) : It is assumed that

    interpersonal comparisons of utility cannot be made. For example assume

    that consumer A prefers x to y and consumer B prefers y to x. We can say

    that A gets more welfare from x and B gets more welfare from y. But we

    cannot compare the welfare of A and B.

  • 8/7/2019 Definition of Welfare

    9/26

    3) Behaviourism ( ) : The preference definition

    assumes that the only information available about consumers is the

    behaviour that can be observed in the market. The mental state of a

    consumer cannot be observed and therefore is not taken into consideration.

    4) Neutrality : only utility information orinformation about

    preferences( ) is taken into account. ( The word

    utility means preference in the preference definition) That is, the

    welfare of a person or a social state is defined only with reference to the

    preferences of individuals.

    5) Anonymity ( ) : The identity of individuals is not

    taken into consideration. Only the preferences are taken into account.

    Social welfare is assumed to remain same if the preferences are

    interchanged between people, since the individual identity is not

    important. Whether A prefers x or B prefers x is not given any

    importance. For example let consumers A, B and C have the following

    preference orderings in two social states:

    Social State 1 :

    A : xPy

    B : xPy

    C : yPx

    Social state 2:

  • 8/7/2019 Definition of Welfare

    10/26

    A : yPx

    B : xPy

    C : xPy

    In both social states majority preference is for x , so x is the social

    preference ( ). The preferences of A and C are

    interchanged ( ). But the social preference

    remains the same. This is because the individuals are not important.

    6) Self - interest motivation ( ) : It is assumed

    that individuals are always motivated by self-interest. Each person is

    concerned only about her own welfare and not the welfare of others. Is

    a person prefers x to y it is because it promotes her self-interest.

    CRITICAL EVALUATION OF PREFERENCE DEFINITION

    MERITS OF PREFERENCE DEFINITION:

    The following are the merits of the preference definition of welfare:

    1) The preference definition requires minimum information. The

    only information required is the observed preferences of a consumer.

    It is easy to obtain this information. Samuelson says that the

    preference definition and the utilitarian definition provide the same

    knowledge about consumer behaviour but the preference definition

    is easier to use.

  • 8/7/2019 Definition of Welfare

    11/26

    2) The preference definition is the basis of the pareto criterion

    which is the most widely used approach to define efficient allocation

    of resources.

    3) Much ofenvironmental economics is based on the preference

    approach to welfare. The preference definition is very useful in

    studying the cause of environmental problems as well as for valuing

    environmental resources.

    4) The most important tool of decision making namely Cost Benefit

    Analysis is based on the preference definition of welfare.

    LIMITATIONS OF THE PREFERENCE DEFINITION

    Preferences may not always indicate welfare for the following

    reasons:

    1) Preference for a good may be based on wrong information. For

    example due to wrong information a consumer may choose a good

    which damages her health.

    2) Preferences can be strongly influenced by advertisements.

    Advertisements can make a consumer prefer goods which are

    harmful.

    3) Preference can be influenced by habit ( ) and custom (

    ). So a consumer may prefer x to y not because x improves her

    welfare but because it is her habit to use x or because in her society

    x is consumed by people traditionally.

  • 8/7/2019 Definition of Welfare

    12/26

    4) Adaptive preferences are a serious problem for preference

    definition. Adaptive preferences refers to preferences which indicate

    that a person is adjusting to her circumstances (

    ). For example a woman may prefer not to go for a job because in her

    society women are discouraged from working out side the house. This

    womens preference does not indicate her welfare but her

    circumstances.

    5) Sen says that people are motivated not only by self-interest but also

    by the desire to help others. This is called altruism (

    ). So a person may prefer x to y because x will help others.

    When there is altruism preference will not indicate welfare.

    5) Sen says that a good definition of welfare should define welfare in

    terms of an object which is the goal in itself. It should not be the

    means to some other goal. Preference is not a goal by itself.

    Preferences are a means for other goals. For example we prefer to

    read a book for information. Information is the goal of our

    preference for reading. The preference itself is not the final goal.

    Therefore preference is not a good definition of welfare.

    6) Sens paretian liberal theorem demonstrates that the pareto rule

    can be in conflict with personal liberty. Sen argues that the way to

  • 8/7/2019 Definition of Welfare

    13/26

    avoid this problem is to go beyond individual preferences in

    conceptualizing welfare, ( ).

    _________________________________________________________

    ________________

    UTILITY FUNCTION

    A utility function indicates the preference ordering of an individual.

    The term utility here does not mean happiness but preference (

    ).

    For example, if for a consumer xPy and yPz, these preference

    orderings are her utility function.

    Properties of a utility function

    The basic preference relationship between alternatives is the

    relationship at least as good as

    ( ) denoted by R .

    xRy means x is at least as good as y ( ). That

    is, either x is preferred to y or the consumer is indifferent between x

    and y.

    A utility function will exist for an individual if the following properties

    are satisfied:

    1) Reflexivity : If x is an alternative then xRx

    2) Transitivity: If xRy and yRz, then xRz

    3) Completeness : Either xRy, or yRx, or both.

  • 8/7/2019 Definition of Welfare

    14/26

    If the above properties are satisfied, a consumer will have a utility

    function.

    _________________________________________________________

    ________________

    PRIMARY GOODS DEFINITION OF WELFARE

    The primary goods definition of welfare was given by John Rawls, an

    American philosopher.

    According to Rawls, the welfare of a person is indicated by primary

    goods. Primary goods are defined as those goods which will be

    demanded by all individuals. Music will not be preferred by all

    people, books will not be preferred by all people, but every person will

    demand the primary goods.

    According to Rawls the following are the primary goods which will be

    demanded by every individual:

    1) Income and wealth

    2) Social bases of self-respect ( )

    3) Freedom

    Rawls says that freedom is the most important primary good

    because if they it is lost it cannot be easily recovered.

    Using the primary goods definition of welfare, person A is said to be

    better-off than person B if A has more quantity of primary goods

    than B.

  • 8/7/2019 Definition of Welfare

    15/26

    Pa > Pb = Wa > Wb

    Where: Pa is the quantity of primary goods with person A

    Pb is the quantity of primary goods with person B

    Wa is the welfare level of A

    Wb is the welfare level of B

    PROPERTIES OF PRIMARY GOODS DEFINITION

    The following are the properties of the primary goods definition of

    welfare:

    1) Social contract formed behind veil of ignorance.

    2) Ordinalism

    3) Interpersonal comparisons of welfare levels

    1) Social contract formed behind veil of ignorance: Rawls says

    that a just society ( ) is a society the rules of

    which will be decided through a social contract ( ).

    It is assumed thatthe social contract is entered into by individuals when

    they are behind the Veil of ignorance ( ). The

    veil of ignorance refers to an imaginary situation where there is no legal

    system and no economic system. The laws formulated in this imaginary

    situation will be just laws because the people are not aware about their

    own situation after a social and economic system is established.

  • 8/7/2019 Definition of Welfare

    16/26

    2) Ordinalism : the ordinal measure of welfare is used in Rawlss

    theory.

    3) Interpersonal comparisons of welfare levels: Rawlss theory of

    welfare requires the use of interpersonal comparisons of welfare

    because these comparisons are needed to identify the people with

    lowest welfare. The interpersonal comparisons in this theory are made

    by comparing the primary goods of different individuals. Level

    comparability is used. That is, in making interpersonal comparisons

    we can say that A is better-off than B because A has higher welfare

    level.

    THE RULES OF A JUST SOCIETY:

    Rawls says that the following rules will be formulated by people

    behind the veil of ignorance :

    1) Every individual will enjoy maximum personal freedom without

    affecting the freedom of other people.

    2) Inequality in society can be accepted only if:

    a) The inequality is due to positions which are occupied through

    open competition. All people should have equal opportunity

    to occupy these positions.

    b) Inequality should benefit all people. Inequality is good only if

    it gives incentive to people to work hard and increase

    production.

  • 8/7/2019 Definition of Welfare

    17/26

    3) The society should use the difference principle: The difference

    principle requires that economic policies should maximize the

    welfare of the person who has the lowest level of welfare, that is

    the person with the lowest amount of primary goods.

    CRITICAL EVALUATION OF PRIMARY GOODS

    DEFINITION:

    MERITS OF PRIMARY GOODS DEFINITION:

    1) Sen says that a good definition of welfare should describe the life

    people are living. The primary goods are a better description

    of the life of people compared to preferences or utility. For

    example a primary good like income is a better indicator of the

    life we can live compared to the level of happiness or the type of

    preferences. Poverty is the major concern in poor countries.

    Economists measure poverty by using either income or the

    quantity of food intake. These two indicators are related to the

    primary goods definition. Therefore to study poverty the primary

    goods approach to welfare is more useful.

    2) The primary goods definition uses interpersonal comparisons

    and therefore the least well-off people in the society can be

    identified.

    3) The measurement of primary goods levels is easy compared to

    measurement of utility.

  • 8/7/2019 Definition of Welfare

    18/26

    4) Rawlss theory of welfare recognizes the importance of

    freedom. Freedom is neglected in the utility and preference

    definitions. The importance of freedom is now recognized in

    welfare economics.

    LIMITATIONS OF PRIMARY GOODS DEFINITION:

    1) Sen says that although primary goods are a better indicator of

    the life of people than utility and preferences, goods do not

    describe the life of people fully. Sen illustrates this point with

    two examples. (1) Rice is a good, but the quantity of rice with a

    person may not be sufficient to meet her food requirements. (2)

    A bicycle is a good but the person owning one may be physically

    challenged and cannot use it. Therefore the availability of

    goods rice and a bicycle alone is not a good indicator about the

    welfare of a person.

    2) Primary goods provide welfare. Goods are a means to obtain

    welfare but not the final goal (

    ). For example food can be used for obtaining good

    health. But food itself is not a welfare object or the final goal of

    people. Since goods are not themselves the goal, primary goods is

    not a satisfactory definition of welfare according to Sen.

    3) Interpersonally comparing primary goods can be misleading. A

    person with lower amount of primary goods may have a

  • 8/7/2019 Definition of Welfare

    19/26

    better life than a person with higher quantity of goods. For

    example: A person A may have more rice than B. But the

    quantity of rice with A may not be sufficient to meet As

    nutritional needs, while the lower amount of rice with B may be

    sufficient for her needs.

    THE CAPABILITY DEFINITION OF WELFARE

    The capability definition of welfare was formulated by Amartya

    Sen.

    The capability approach to welfare defines welfare in terms of

    the life people are living. Sen distinguishes two components of

    welfare:

    1) Functionings

    2) Capabilities

    1) Functionings: Functioningsrefer to the activities people are

    able to perform (

    ). The ability to read and write is a

    functioning. The ability to avoid disease like cholera is a

    functioning. Functionings show the life people are leading.

    The capabilities definition can be understood if it is compared with the

    other definitions of welfare. This can be shown as follows:

  • 8/7/2019 Definition of Welfare

    20/26

    GOODS -------------- FUNCTIONINGS --------------

    UTILITY

    Rice --------------- Good health

    Bicycle --------------- Movement

    Rice is a good. It provides good health which is a functioning. Health

    results in utility.

    A bicycle is a good. It provides the ability to move around. This is a

    functioning. The ability to move around provides utility.

    Rawls is interested in the quantity of goods like rice and bicycles.

    Utilitarians concentrate on the utility obtained.

    Sen gives importance to the functionings resulting from these goods.

    Having rice and a bicycle is not enough unless they can be used for various

    functionings.

    We can say that functionings provide Sens narrow definition of

    welfare( ).

    The broad definition is provided by capabilities.

    2) Capabilities: Capabilitiesrefer to the freedom people have to choose

    the kind of life they want to live (

    ).

  • 8/7/2019 Definition of Welfare

    21/26

    The difference between capabilities and functionings can be

    explained by this example given by Sen: Two people, A and B,

    did not have food last 24 hours. A has not eaten food because

    she is fasting ( ). B has not eaten because she is

    poor and cannot afford to purchase food. So A is going without

    food voluntarily. It is herchoice to go without food If she

    chooses, she can eat food (

    ). B is going without food involuntarily. B does

    not have a choice.

    The functionings of A and B is their life without food for 24

    hours. The functionings are the same for A and B.

    The capabilities of A and B are the freedom or choice they have

    to eat food. A has the choice but B does not. So the capabilities

    are different. A has more capabilities than B.

    The welfare of a person can be defined as her capabilities to perform

    various functionings.

    This is the broad definition of welfare.

    FREEDOM AND WELFARE:

    Freedom is an important element in Sens theory of welfare. Freedom

    can be divided into two types:

    1) Negative freedom.

    2) Positive freedom

  • 8/7/2019 Definition of Welfare

    22/26

    Negative freedom refers to freedom from intervention by others (

    ). For example, if a person has the money required to go to college,

    negative freedom means no one should prevent her from going to a

    college.

    Positive freedom refers to the freedom to perform some activity (

    ), for example the freedom to get education. There is positive freedom if

    those who want to go to college are able to go to college even if they do

    not have the money.

    Negative freedom assumes that a person has the ability to perform

    some activity (like getting education). No one should prevent the person

    from using her ability. If the ability is not there, the person need not be

    helped.

    Positive freedom means that if the ability is not there the person should be

    helped to obtain the ability.

    The capability definition of welfare is based on the idea of positive

    freedom. Sen says that all people should have the freedom to perform the

    basic functionings such as going to school or getting medical treatment.

    Sen identifies the following as the basic capabilities:

    1) The capability to be literate.

    2) The capability to lead a long and healthy life.

    3) The capability to earn income to have access to important resources.

  • 8/7/2019 Definition of Welfare

    23/26

    The above are the basic choices because unless a person has the

    freedom to choose to be literate, lead a long and healthy life, and

    have access to important resources she cannot make any other

    choices.

    Sen says that every person has the right to these basic capabilities. If the

    free-market cannot provide them, the state should provide them.

    PROPERTIES OF CAPABILITY DEFINITION:

    1) Human beings are treated as ends in themselves and not as means

    to an end (

    ). Capabilities should be increased

    because they are required for a good life and not for increasing labour

    productivity or GNP.

    2) Non-utility information is used in the capability definition. Non-

    utility information refers to information about freedom, health of

    individuals, distribution of income etc. The assumption of

    neutrality is rejected ( Neutrality means that only preferences or

    satisfaction levels should be taken into account).

    3) The identity of individuals is taken into account (

    ). For example assume that a policy affects two people A and B. The

    policy makes A better-off ( ) and B worse-off (

    ). It is important to find out whether A is rich or poor, man or

  • 8/7/2019 Definition of Welfare

    24/26

    woman etc. Anonymity is rejected ( Anonymity means that

    individual identity is not important).

    4) Interpersonal comparisons of welfare are used. Sen says that

    without interpersonal comparisons it is not possible to study

    important things like inequality and poverty.

    EVALUATION OF CAPABILITY DEFINITION:

    MERITS OF CAPABILITY DEFINITION:

    1) The capability definition satisfies the two criteria of a good

    definition of welfare:

    a) It is concerned with the life people are living.

    b) It defines welfare in terms of objects which are important

    goals in themselves. Capability is a goal in itself (

    ).

    2) It uses all the required information for studying welfare:

    a) It uses cardinal utility as well as interpersonal comparisons of

    utility.

    b) It makes use of non-utility information.

    c) It takes into account how different categories of people ( rich

    and poor; men and women etc) are affected by policies.

    3) It is easy to get information on the basic capabilities.

  • 8/7/2019 Definition of Welfare

    25/26

    4) The capability definition of welfare has been found useful in several

    ways:

    a) The capability approach has been used to formulate a

    development indicator called the human development index

    (HDI) as an alternative to the GNP.

    b)It has been used to study thewelfare status of women. The

    capability approach can be used to study how economic and non-economic

    factors such as religion affect womens welfare.

    c)It provides a basis forstudy of poverty and inequality.

    LIMITATIONS OF THE CAPABILITY DEFINITION

    1) The capability definition is a vague definition (

    ). It is not as precise as the preference or utility definitions. But Sen

    says that it is better to be vaguely right than to be precisely wrong

    2) It neglects the importance of investment in human capital for

    increasing productivity and growth. For example, Sen says that

    education is an important goal itself. He ignores the contribution of

    education to labour productivity. According to Partha Dasgupta if the

    returns from this is not taken into account, poor countries may not

    invest enough in education.

    3) The definition concentrates on the need to expand human

    capabilities ignoring the importance of economic growth. Without

  • 8/7/2019 Definition of Welfare

    26/26

    economic growth the resources for providing basic capabilities will

    not be available.